Stock Market Crash August 2011

Stock Market Crash August 2011

Since the sell off and technical damage was serious over the last week, it’s a great time to look back and take note of the signposts that led the way over the last few months.

Keystone chronicled the broad markets topping and rolling over all year long leading up into the selloff. The charts led the way as usual.  The technicals led the way all year long. Keystone’s algorithm that trades the indexes long-short, using the SPX as a benchmark index, went short on 7/11/11 at SPX 1324.

Chronology of Market Events Leading to the August 2011 Crash:

In February 2011, the charts show that financials, technology, semiconductors have topped and are rolling over. This is ominous considering the importance of these sectors. The weekly charts displayed negative divergence forecasting multi-week and multi-month weakness ahead.

On 5/17/11, Keystone's algorithm states that we have fallen back into a double dip in housing, hence, a double dip in the economy.

On 5/20/11, Keystone’s SPXA150R Indicator dropped under 80% indicating that the long bull rally had lost steam and the broad markets are turning bearish.

On 6/17/11, Keystone’s NYA 40 Week MA Cross Secular Indicator shows price falling under the 40 week MA signaling that the broad markets are falling into a secular bear market pattern. This fight between price and the 40 week MA continued into July until the change to a secular bear was locked in more firmly on 7/28/11.

On 7/11/11, Keystone’s proprietary algorithm, Keybot the Quant, went short at SPX 1324.

On 7/26/11, Keystone’s SPX:VIX Indicator fell under 68 signaling a large move down in equities is imminent. For 7/26/11 and 7/27/11, the SPX fell 2.5% and the Dow Industrials dropped 2.3%.

On 8/1/11, Keystone's 2-10 Spread Indicator dropped under the critical 255 level indicating that the yield curve was no longer attractive for banks.  Considering that the financials topped in February, and now the spread indicator has failed, a world of pain is ahead for banks and this will hurt the broad markets accordingly.

On 8/2/11, Keystone’s SPX 150 Day MA Slope Secular Indicator shows that the slope of the 150 day MA has leveled off and is now turning negative. A stutter step occurs 8/3 but 8/4 shows again that the slope has now reversed and the secular bull run from last December 2010 for the indexes has ended. The secular bear has returned.

On 8/2/11, Keystone’s SPX 12 Month MA Cross Secular Indicator shows price falling under the 12 month MA signaling that the broad markets are falling into a secular bear market pattern. This was a major dagger in the broad markets and ends the one year long secular bull market.

On 8/3/11, copper collapsed around lunchtime. On 8/4/11, utilities collapsed in the morning which opened the flood gates for a market collapse. Once the utes, UTIL, lost their 50 week MA, a trap door was projected for the broad markets, which occurred during the afternoon.

On 8/4/11, the broad market selling forms a crescendo, the SPX losing 60 points, or 4.8%, and the Dow Industrials dropping 513 points, or 4.3%, today. Wild price movement occurs on 8/5/11, placing an intraday low of 1168, but closing unchanged at 1199. The move down was remarkable, the SPX moving from about 1350 to 1200, about 150 points, a stunning 11%, in only nine days.

Looking Forward:

All that matters in trading is the projection forward.  Looking backwards while walking results in a face plant into a street pole and several lost teeth. The past is gone, what happens next?

As shown above, three of Keystone’s four secular signals are now in a secular bear market. Only the UPS 20 and 50 Week MA Cross remains as a secular bull. Watch this closely since the 20 week MA falling under the 50 MA for UPS will signal even deeper trouble for markets on a long term basis. Thus, continue to monitor all four signals moving forward. This site has a separate page that tracks the secular turns.

For Keystone’s short term turn signals, the SPXA150R indicator is at a low 14.60, under the 15 level.  The equities are washed out from this reading and a rally will occur as soon as the SPXA150R moves back above 15. This indicator wants to see a market bounce now.

Keystone’s SPX:VIX Ratio uses the 35 level to signal where a rally should occur.  The ratio has a 37 handle now so the indexes are close to a wash out and a recovery bounce would be expected now. The ratio prefers to see a move under 35, then the move back above 35 will trigger the rally, but, considering the drastic sell off last week, the rally may occur at any time.

SPX 1150-1170 is firm support and represents a lower channel area support as well. The 200 week MA is in this area too that has served as support in the past. Thus, the market bulls cannot let markets fall lower than here or the markets will enter a wildly negative zone.

Other shorter term charts such as CPC put/call, VIX, NYAD, NYHL, NYMO all are agreeable to markets receiving a snap back rally now.  The S&P downgrade will be front and center for Monday’s opening bell but much of this is probably priced in.  The Europe news will probably carry more clout for the broad markets tomorrow. Thus, markets should experience a snap back rally any time now, current projection is that the 1150-1170 support area should hold, for now.

Make no mistake, the secular signals that have turned bearish foretell continued equity weakness thru the end of the year for the IT and LT basis.